Theme 2 - National Income and growth Flashcards
what is meant by the circular flow of income
the circular flow of income shows how different sectors of the economy link together, for example workers are employed by firms and there is a money flow from the firm to workers through wages, and a real flow the other way from workers to firms in the form of labour supplied.
illustrate the circular flow of income concept with a diagram
see theme 2 topic sheet 3 first page
explain the impact of investment on economic growth
In the short run, investment increases AD, and therefore increases real output. In the long run, an increase in investment increases the quantity of capital in the economy and increases the productive potential of the economy.
explain the impact of innovation or improvements in tech on economic growth
innovation and improvements in tech increase the productive potential through better quality of capital and potentially more productivity of labour
explain how migration affects economic growth
inward migration means there is a higher quantity of labour in the economy and increases its productive potential
how does improvements in the health service or education affect economic growth
it increases the quality of labour therefore increasing the productive potential
explain how changes in birth rates would affect economic growth
after a time lag there would be a decrease in the quantity of labour and therefore the productive potential in the economy
how would an increase in exports affect economic growth
more exports means temporarily increased AD as x-m is a part of that, it may also trigger firms to invest more to satisfy overseas demand which would lead to an increase in capital in the economy and long run economic growth
how would government instability affect economic growth
when governments are unstable or unpredictable then firms feel uncertain about their future which leads to decreased investment therefore economic growth
explain how a credit crunch or reduced access to finance might affect economic growth
decreased access to credit will cause firms to invest less therefore decreasing economic growth short and long run
distinguish between actual and potential economic growth
actual is the change in GDP over time, whereas potential economic growth measures how much could be produced if all factors of production were fully and efficiently employed
how might limited access to foreign currency constraint economic growth
if they cannot exchange enough currency then this limits the ability to import raw materials and capital needed for development so economic growth decreases
how might low savings rates constraint economic growth
if savings are low, banks don’t have much money to lend out to firms wanting to invest in new capital, this may create a credit crunch which decreases economic growth
give 5 examples of events that would increase SRAS or AD or ACTUAL economic growth
- decrease in energy costs. - decrease in real wages. -decrease in interest rates. - increase in business confidence. - a decrease in VAT
give 5 examples of events that would increase LRAS
- an increase in the number of firms offering apprenticeships. - longer mandatory school time. - increased migration. - decrease in corporation tax so more investment. - tech improvements. - increased incentive to work (lower JSA)
